Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 355

Coronavirus and the fragilities of Italy and the eurozone

‘il Boom’ is how Italians describe the ‘great transformation’ of Italy over the 1950s and 1960s when a poor country turned itself into a modern industrial powerhouse with a stable currency, the lira. Such was Italy’s rising wealth and status, the country in 1957 became one of the six founding members of what later became the EU.

Italy’s progress, however, soon faltered. The country’s political system became corrupted. The graft along with low productivity, militant trade unions, suffocating bureaucracy, poor education, emigration, a fragmented banking system, an ageing population and unaffordable welfare hampered Italy’s competitiveness. As the economy stagnated, Rome’s main policy response was to endlessly devalue the lira. Italy’s government debt at 120% of output in 1999 prompted the Netherlands and Germany to oppose Italy joining the common currency. Germany’s then chancellor Helmut Kohl chose to accept Rome’s promises it would fix its finances and allowed Italy into the eurozone.

Perhaps he shouldn’t have. Two decades later, Italy is so weak economically, financially and politically it poses an existential threat to the eurozone. A euro overvalued compared with the lira on top of Italy’s economic flaws and demographic handicaps – its ageing population, Europe’s oldest, is shrinking – has frozen Italian living standards at 1999 levels. Italian banks are burdened with bad debts. Rome’s finances have deteriorated so that its debt stood at 135% of GDP at year end. The upending of Italy’s political system after corruption scandals broke from 1992 led to the rise of populists. The country’s 65th government since World War II in power now is an unlikely coalition of the centre-left Democratic Party and anti-establishment Five Star.

Such was the state of Italy when the coronavirus struck the eurozone’s third-largest economy. The question troubling the eurozone, which will only grow in menace over time, is how will Rome fund a recovery from the virus-induced recession when it can only borrow in euros, amid projections its debt could soar to a default-prone 180% of GDP. Knowing the country faces higher borrowing costs, Rome has pleaded for help from fellow euro users and once again exposed the central flaw of the eurozone. The great weakness of the common currency is that it is a monetary union without fiscal union. Brussels is incapable of directing substantial funds to help Italy and other strugglers, and creditor countries, which are battered too by the coronavirus, are refusing the closer fiscal ties. The flashpoint has been their refusal to sanction eurobonds dubbed ‘coronabonds’ that would allow debtor countries to access funds at lower interest rates.

A standoff only serves to fan the euroscepticism that lingers over the continent and Italy especially. In the absence of steps towards a fiscal union, Italy in the near term is hurtling towards three outcomes, one of which could herald an imminent shock for the world economy. The turbulent outcome is that Italy’s government defaults like Greece’s did from 2012 but perhaps with fatal ramifications for the eurozone because Rome’s debts are estimated to be 20 times larger than were those of Athens. The second possibility is that Rome defaults in an undisruptive way because Italy swallows a bailout that offsets the damage of an ‘extend and pretend’ solution. The third possibility is that Italy accepts some conditional aid to avoid a default. Under the latter two possibilities, the eurozone would be preserved for now but Italy would still be struggling enough to pose a longer-term threat to the euro. Whatever happens in coming times, Italy’s woes are bound to eventually trigger a watershed event for the eurozone. Europe could become a much closer union or, at great cost, fragmented again.

Let’s acknowledge that no officials can outdo eurozone policymakers in finessing last-minute fudges that postpone reckonings. But quasi-solutions would condemn Italy to more stagnation that might shape public support for a euro departure come a future shock. Creditor nations have a point that their taxpayers should not pay for southern profligacy. The eurozone could fulfil the perverse destiny foreshadowed by its founders; they seemed to understand that Europe could only become a fiscal and political union when a crisis posed a threat to peace and prosperity.

While there are few signs that Europe is ready for closer union, the likelihood of a reckoning happening in coming years is rising. The coming times could see creditor nations sanctioning closer fiscal ties to help Italy. Or Italy might embark on a post-default or post-euro future. Whatever happens, it’s unlikely that anyone any time soon will describe Italy’s upcoming era as “il Boom”.

 

Michael Collins is an Investment Specialist at Magellan Asset Management, a sponsor of Firstlinks. This article is for general information purposes only, not investment advice. For the full version of this article and to view sources, go to: https://www.magellangroup.com.au/insights/.

For more articles and papers from Magellan, please click here.

 

  •   27 April 2020
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

Three reasons high inflation may trigger a European crisis

Europe: A new growth trajectory powered by reform and investment

Halving super drawdowns helps wealthy retirees most

banner

Most viewed in recent weeks

Testamentary trusts post-budget: Estate planning, tax reform and the ‘death tax’ debate

Proposed Budget changes to taxation are casting new uncertainty over testamentary trusts, prompting closer scrutiny of estate planning structures and the real implications of reforms still taking shape.

High quality businesses are on sale

Beneath the dominance of the ASX's largest stocks, much of the market has been left behind. High-quality companies are now trading at levels rarely seen, offering opportunities for investors willing to look deeper.

Meg on SMSFs: The CGT changes don’t impact super but what about Div 296 tax decisions?

New CGT rules could tip the scales in the super vs non-super debate. For those facing the Division 296 tax, the case for withdrawing has gotten more complex. A "comparison rate" tool may help assess decisions.

The strange effect of the 30% minimum capital gains tax

The 30% minimum tax on capital gains sits at the heart of the budget's proposed reforms. Yet the mechanics reveal anomalies that introduce unexpected distortions that raise questions about its design.

Welcome to Firstlinks Edition 667 with weekend update

The downfall of the giant and three lessons for investors.

  • 18 June 2026

Ranking three common retirement strategies

The defining challenge of retirement isn't just about building wealth, it's about converting your lifetime savings into sustainable income. A holistic understanding of different strategies can improve long-term outcomes.

Latest Updates

Planning

Does your will qualify for the discretionary testamentary trust exemption?

Treasury has confirmed the exemption many families were hoping for. But buried in the fine print are two conditions that could leave some wills on the wrong side of the exemption, despite years of careful planning. 

Lithium's latest drop and what it means for ASX investors

Lithium's latest sell-off has punished ASX miners as prices remain hostage to shifting expectations. The key challenge is navigating a market prone to extreme volatility despite a strong case for the long-term demand outlook.

Investment strategies

CGT reform and fund turnover: who really feels the impact?

The implications of CGT reform are far and wide. As the 50% discount gives way to inflation indexation, turnover and return profiles may become critical drivers of after-tax performance. Some strategies face a far greater hit. 

Superannuation

Super was built for a very different Australia

Our retirement system was built around assumptions that no longer hold. Lower homeownership, longer lifespans and changing expectations are exposing cracks that policymakers and super funds need to address. 

Retirement

Retirement in reality - 4 months in

Many people spend years planning financially for retirement but little time preparing for what comes next. Four months in, here are the surprising lessons i've learnt on finding purpose, social connection and healthy habits. 

Investment strategies

After the Budget, Australia needs its own definition of quality

As tax reforms reshape investment incentives, investors should rethink what quality investing means in the uniquely concentrated Australian market, where traditional frameworks may not translate as effectively.

Datacenters are the new shale oil

Why are tech giants pouring billions into datacentres when the economics look questionable? The most dangerous words in investing may be: "everyone else is doing it". Today's AI boom has striking parallels with the shale bust.

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.